8/04/2009 @ 2:00PM

Tech Leads The World Out

Investor portfolios are now fully benefiting from resumed global growth led by China’s fiscal efforts and an expansive Federal Reserve. No longer do companies speak of subsidized green and environmental demand for their source of new income. Instead, greater Asia especially, but also the U.S. and Germany have moved back in the plus column as the world’s largest economies team with sufficient liquidity to propel synchronous growth. Kudos to China’s stimulus architects and the Fed’s continued accommodation. July purchasing managers reports provide the teachable lesson that China’s tying together previously developed coastal regions with its massive interior containing the lion’s share of population brings quick fruits to the nation at large. Their stimulus targeted technologically based, infrastructure modernization that benefits an entire society, as well as its trading partners.

Export orders have also notably strengthened the past month in China, spreading the benefits to its trading partners, particularly within greater Asia but also to capital goods suppliers Japan, Germany and the U.S. Even as the American consumer replenishes its over-leveraged balance sheet, economic figures continue to progress, with resumed strength in automobile, housing and semiconductor production. Low inventories combine with massive monetary ease and resumed corporate profits to propel these significant facets of the American economy back to the plus column. The stock market is duly noting this turn of fortune.

The other factor at work in this new bull market is moderation of the moral authority gained from last fall’s election, a factor that has led many to fret over the future course of free enterprise and capitalist opportunity. The most ambitious social program that appeared steamrolling to success just a few weeks ago has been curbed by a series of untoward remarks delivered to some of the country’s most determined enemies and public denigration of domestic law enforcement. The political machine is no longer larger than life, instead is getting a dose of community feedback, push-back at the grass roots level over aggressive social policies force-fed by unwillingness to apologize to a policeman doing an everyday job. The unseemly suds festival on White House grounds has left America taking a very hard look, welcome news for a stock market wishing minimalist government.

The forthcoming earnings release from
Cisco Systems
will make clear, adding to what
IBM
said two weeks ago, that technology is the key to an ever more integrated world economy, the key to progress, rising incomes, living standards and, yes, jobs.

Again, China is showing the way, as its stimulus package not just updated its infrastructure but focused on the most modern electronics tools. The basic commercial grid put in place over the last half dozen years facilitates trade flows among disparate regions and ties together emerging countries to further globalization, elevating the global wealth curve. Spats over whose currency leads, whose bonds are most desirable to be held in reserve and the recession’s contraction in trade miss the point, looking unduly backward when sights should be attuned to the budding expansion. Investment impetus will now shift from concrete and steel to high-speed electronic communications to further enhance productivity, just as we saw in the U.S. from the early 1990s when repeated forecasts of inflation, high unemployment and slow growth were blown away by information technology’s networked miracle.

This means even greater investment in coming months and years in higher speed, more extensive communications, storage and computing networks. Wireless telephony facilitating a mobile lifestyle gains special impetus from the profusion of powerful interactive handheld devices now flooding the market.

As cellular data rates catch up with fixed land-line broadband and new security measures are implemented, business and personal tasks further meld in the form of new electronic instruments, to wit smart phones, netbooks and notebook PCs. Tying these together into seamless information webs is the singular province of Cisco, IBM,
Apple
and
Research in Motion
, along with weeks of bullish inputs from components, motherboard and assembly supply-chain makes it clear that Cisco’s forthcoming July quarter earnings release will set a most bullish stage. The likes of
Broadcom
,
NetLogic
,
TriQuint
and
PMC-Sierra
are just several of many chip beneficiaries.

Similar stories of strength through
Intel’s
supply chain, encompassing its microprocessors as well as analog and digital logic chips from a host of support cast such as
Intersil
,
Linear Technology
,
Maxim
,
Analog Devices
,
Cypress Semiconductor
and
International Rectifier
echo increasingly bullish words from the Semiconductor Industry Association.

The latter’s long-time president and long-standing chip veteran George Scalise all but tore up this eminent trade group’s 2009 forecast when reporting the most recent figures, clearly indicating his view that second-half results would materially exceed earlier views. This almost certainly means that just-raised guidance from a host of public companies will be soon raised, reversing two years of caution and hesitance, returning this technology bellwether to a decidedly expansionary course as 2010 beckons. And chip makers no longer speak of subsidized alternate energy projects, focusing on traditional sources of growth such as PCs and cellphones.

Reports of increased capital outlays for semiconductor production equipment, both front-end to make chips as well as back-end to test, package and assemble these into electronic systems broadly jive well with higher memory chip prices, strong microprocessor demand and expanding lead-times for most every chip class. Intel’s mid-to-high single digit sequential revenue growth forecast for the third quarter is well beneath typical low teens quarter-on-quarter growth during the back-to-school and pre-holiday periods ahead. Combined with expansionist consumer outlays in Asia and European recovery, the latest in an increasingly lengthy series of positive U.S. economic data means second-half earnings significantly above present Street consensus, with upside to 2010 as well. This is the stuff of durable bull markets.

Having raised contract prices for all three forms of DDR DRAM memories in the new month of August from July levels,
Micron Technology
also notes higher NAND Flash memory prices the last several weeks, reversing a month-plus of weak demand. Buyers, especially mobile phone and entertainment producers such as Apple, are apparently pushing up unit buy rates several-fold as they anticipate second-half production shortages for these essential multimedia components. The rub has been that Asian capital was so plentiful that ample capacity has nearly always exceeded demand the last half dozen years, keeping profit margins low even in good times. Could this be ready to change in the aftermath of global credit crunch, with lenders only willing to get back to old habits once commodity memory producers turn decidedly profitable? Experience of prior down and upturns would suggest such rationing likely, turning last year’s wasteland into tomorrow’s safe-haven. Both Micron and Sandisk could be set for strong market returns at least through the remainder of 2009.

If memory stocks play in any major way, this will further cement the upturn in semiconductor capital equipment shares, further propelling the likes of
Applied Materials
,
ASML Holding
,
KLA-Tencor
,
Lam Research
,
Cymer
,
Teradyne
and
Kulicke and Soffa
. Each of these has been around for multiple chip cycles, and a large investing audience well understands their strong competitive hold on served nice markets. None of these companies frontally competes with one another, rather they mostly complement one another as the capital underpinning required as the world demand more of the latest generation of semiconductors, flat panel displays and even solar panels.